Mr PC Goes to Washington

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When PC Forum, an exclusive shindig for technology bosses, venture capitalists and other digerati, recently celebrated its 25th anniversary, the motto was “back to the frontier”. But the panels and speeches suggested a different destination. Most debates were about what government should or should not do. The high-tech sector is more afraid than ever of government intervention — which is why it is becoming as involved as any other industry in Washington lobbying. The process has been accelerated by the new emphasis on homeland security.

To some extent, the industry has come full circle. It was tax dollars that first primed the technology pump. Without money from the Pentagon, Silicon Valley might still be covered with fruit orchards. The Internet was for years a government-funded research project, and some big technology companies would not exist without government contracts. For example, Oracle, the leading database vendor, grew out of a consulting job for the CIA.

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The prevailing free-wheeling, libertarian stance of the industry, always somewhat hypocritical, has been changing since the mid-1990s. Some date Silicon Valley’s political coming-of-age to its 1996 campaign against a California initiative that would have made shareholder lawsuits much easier. This led to the creation of such groups as TechNet, a sort of high-tech lobbying group. There was also the catharsis of the Microsoft antitrust trial, which brought forth mass lobbying by both sides — as well as a noticeable rise in campaign-finance contributions.

Over the past few years, the industry has been beefing up its lobbying further. One pet issue is high-speed Internet access, known as broadband. Intel, Microsoft and others have long argued that the government should do something to get broadband more widely deployed (only about 9% of American households have a high-speed Internet connection). They argue that this would be a powerful driver of demand for computers, software and online services.

It was only after the Internet bubble popped and the technology industry went into recession, however, that companies really started pushing the issue. TechNet and others have called for a “national broadband policy”, which would give tax breaks to encourage innovation and prod the Pentagon and other government agencies into buying more broadband gear.

A controversial recent bill shows, however, that high tech’s lobbying efforts are still not on a par with those of other big industries. Technology companies were taken by surprise when Disney and other media giants persuaded Senator Fritz Hollings to introduce legislation that would require a piracy-detection system to be built into all digital entertainment devices, including PCs. At a Senate hearing in February, only Les Vadasz, a senior executive at Intel, was there to testify against the bill. It would, he claimed, turn PCs into “nothing more than a more expensive version of a ‘dumb’ DVD player.”

Nobody expects the Hollings bill actually to make it through Congress. But it may have achieved its main objective: to prepare the ground for more indirect regulation. Hollywood hopes that such legislative threats will pressure hardware makers to agree to copy-protection standards that could then be ratified by Congress.

The New Climate

Arguably, all this could be called business as usual in Washington: industries defend their competing interests and, more often than not, end in stalemate. Yet recent events have changed the climate. For a start, there is the fallout from Enron’s collapse. The firm’s bad practices have led Congress to take a close look at the accounting treatment of stock options, the lifeblood of Silicon Valley.

Then there is the new emphasis on homeland security. This has not only brought about a sweeping anti-terrorism bill, called the Patriot Act, which gives law enforcers new surveillance powers, such as monitoring Internet traffic without a court order. Government is also becoming a key customer once again. It accounted for 23% of Oracle’s revenues in the past fiscal year, for instance, although this impressive share may now shrink. It emerged recently that the firm sold the state of California (and, perhaps, other states) far more software than it needed.

One reason for government’s return as a customer is that it has the means. The administration has proposed increasing the federal high technology budget from $46 billion in the current fiscal year to $52 billion in 2003. Big software firms are angling for a piece of the bigger pie. Oracle, Siebel and Tibco have all launched “homeland security initiatives” aimed at offering the government technology to integrate its disparate databases — and so helping it to identify possible terrorists. Moreover, since Washington expects technology to do much to improve security, vendors have made their top researchers available as government advisers.

Even start-ups are learning to love the government — after having been traditionally discouraged by venture capitalists from getting involved with the bureaucracy of public procurement. One sign is the sudden interest in In-Q-Tel, the CIA’s venture-capital fund (yes, the spooks have one too). Since September 11th, the fund’s chief executive, Gilman Louie, has been asked to review 1,200 business plans, compared with only 1,000 from the fund’s creation in October 1999 to the terrorist attacks.

Since its inception, In-Q-Tel has invested in more than two dozen firms, such as graviton, a maker of tiny wireless sensors, and SafeWeb, which is developing software that allows users (and thus secret agents as well) to surf the web anonymously. The fund was first seen mainly as a pet project of the CIA director, George Tenet, who wanted to give the agency early access to technology developed in the commercial world. But several other federal agencies are now considering using In-Q-Tel’s services or starting their own venture-capital funds.

It is not clear what the long-term effects of all this will be. Security is likely to play a bigger role in the design of technology — to the detriment of such things as additional product features, ease of use and performance. A more problematic outcome could be that the closer relationship due to the emphasis on homeland security will lead to a heavier regulatory environment for technology.

The rapprochement will, in any case, settle the question of whether the high-tech industry and government can remain at arm’s length. As Intel’s Mr Vadasz was heard saying at PC Forum: “We cannot say the net will have a huge influence on everyday life, and also say ‘Hey Washington, keep out of it’.”